Tax evasion and avoidance sound almost similar, but they are like day and night. While one is perfectly legal and widespread, the other is unlawful and could land you in trouble with the IRS.
Understanding the differences between the two will ensure you stay on the safe side of the law. Here is what you need to know.
Tax avoidance is legal while tax evasion is not
Tax evasion is using illegal methods to avoid paying taxes. For instance, you may fail to report all or some of your taxes in a bid to shortchange the taxman. Alternatively, you may deliberately underpay your taxes or fail to file your returns.
All of these actions are illegal. You could be jailed for several years or heavily fined for attempting to or evading taxes. It is a crime and will appear on your record.
On the other hand, tax avoidance is using lawful methods to reduce taxes owed or taxable income. It is not criminal when you use the systems in place or other legal loopholes to pay lower taxes. Such scenarios include claiming a deduction for interest paid on a mortgage or utilizing other tax credits if you qualify.
It’s better to be safe than sorry
Mistakes on your financial paperwork and tax returns may not amount to tax evasion. However, it all depends on the circumstances of each case, and you may find yourself on the IRS radar. It helps to understand tax laws and makes sense between avoidance and evasion as a business owner or private individual.
With the proper information, you can legally avoid some taxes and protect yourself from potential legal and financial sanctions. Also, consider seeking informed counsel if you have been charged with evasion or any other tax crime, given the stakes.